UPS Shares Spike on 2nd-Quarter Earnings Beat
Before the market opened on July 30, United Postal Service (NYSE:UPS) released its earnings results for the second quarter of 2020.
Both revenue and earnings per share blew past analysts' estimates, causing the share price to spike nearly 15% throughout the course of the day.
Key numbers
UPS reported revenue of $20.46 billion, representing a 13.4% year-over-year increase, while GAAP earnings per share were up 8.7% to $2.03 compared to the same period of the previous year. Non-GAAP earnings were $2.13. According to analysts surveyed by Refinitiv, Wall Street had been expecting revenue of $17.48 billion and non-GAAP earnings of $1.07.
The major difference between GAAP and non-GAAP EPS was a negative impact of 10 cents per share from pre-tax transformation charges (compared to 2 cents per share in the prior-year quarter). "Transformation charges" refers to any expenditures the company makes in the process of improving business operations.
The operating margins were 9% for the U.S. domestic segment, 20.8% for the international segment and 7% for the supply chain and freight segment. Of the three operating segments, only international saw an improvement in its operating margins compared to a year ago. The domestic segments saw margins decline, in part due to the fact that it simply could not deliver all of the packages it took on without incurring additional expenses.
Overall, the company reported no net headwind from the pandemic, reporting only $44 million in Covid-19-related expenses compared to tailwinds of increased demand and lower fuel costs. Lower fuel costs alone were a $61 million tailwind, which would not have been possible without the dramatic reduction in fuel consumption worldwide.
Delivery logistics
U.S. average daily package delivery volumes increased 22.8%, reaching 21.1 million packages per day, strongly driven by increased demand in both the domestic and international segments.
Of particular note was the 65.2% increase in consumer shipments, driven mostly by a surge in residential domestic delivery. Strong demand rebound, particularly in Asia, also drove up volumes for the more profitable international segment, which saw 9.8% overall growth for the quarter.
Due to the incredible surge in demand, UPS simply could not deliver all of its packages, so it relied more on its hybrid services with USPS (which is technically the only mail service with a mandate to ensure delivery). You might have noticed USPS trucks full of UPS and Amazon packages driving around since the Covid-19 crisis got rolling. The reason for this is that the mail delivery services have partnerships in which USPS will deliver packages the last leg of their journey (unless UPS is able to deliver them more cheaply that entrusting them to USPS, which is rare). These hybrid services include SurePost, which represented 53% of total U.S. domestic volume growth for the quarter. SurePost and other hybrid services also contributed to the margin declines during the quarter, as they are meant to be both cheaper for package senders and insurance against volumes exceeding what UPS alone can deliver.
Looking forward
The company did not provide much in the way of guidance, but it did announce expected dividends of $4.04 per share for full-year 2020 compared to $3.84 per share in 2019.
CEO Carol Tome had the following to say:
"Our results were better than we expected, driven in part by the changes in demand that emerged from the pandemic, including a surge in residential volume, COVID-19 related healthcare shipments and strong outbound demand from Asia. UPSers are keeping the world moving during this time of need and I want to thank our team for their hard work and outstanding efforts to serve our customers, our communities and each other."
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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